Hi,
Formula from video at time -1.38 says notional exposure = call option price * multiplier * open interest.
While section 5 unit 2 says notional exposure = underlying price * lot size.
Also section 5 unit 9 says need of underlying price.
So which is true? Thank you
Course Name: Systematic Options Trading, Section No: 5, Unit No: 1, Unit type: Video
Hi,
Thank you for bringing this up. There is some confusion here and let me try to resolve this.
Notional exposure in simple terms is how much notional value (or risk) are you exposed to. With respect to equity, if you buy one stock of $100, then the notional exposure could be $100. 10 shares of $100 each means $1000.
Now when we come to options, let’s say you are looking at an asset with an underlying price of $4000. And you buy 1 option which has a lot size of 100, then your notional exposure is $4000 * 100 = $400,000. Notice the word “your” in the previous sentence. Here, we are calculating a personal notional exposure.
For using open interest as an options screener, you will look at the open interest as well and then multiply this options interest with the earlier formula (underlying price * lot size) to get a “total” notional exposure for that option with strike price. This brings us to the formula "Notional exposure for the contract = Underling price * Lot size or multiplier * open interest. In the video, we mention “call option of 4000”, we actually meant the strike price which is close to “at the money” and that is why it is the underlying price.
In section 5 unit 2, we are only considering our notional exposure. And in section 5 unit 9, we need the underlying price as well.
We will look into the section content and revise the content to remove any ambiguity.
Hope this helps.